3/19/2009 @ 12:42PM

Resurrection In Oilfield Services

We all know that oil prices have fallen dramatically from their highs in the summer of 2008, but different types of oil-related stocks have reacted quite differently to the price change in the underlying commodity.

While oil itself has dropped nearly 70% from its 12-month high, the stock of the largest integrated oil company,
Exxon Mobil
, is down only 26%, less than the stock market as a whole. At the same time, the largest oilfield services company,
Schlumberger
, is off by 66%, more in line with oil itself. And some of the smaller oil services names are down even more.

We find this volatility in the oilfield service stocks intriguing. Many experts believe that oil prices are at unsustainably low prices now, and they expect a sharp rise in the commodity price as supply and demand come back into line again. If oil does march substantially higher in price, the oilfield service stocks could rebound sharply.

Even if oil prices remain low for a while, we think the service stocks could perform reasonably well. Exploration activity slows somewhat when the price of oil drops, but it goes on nonetheless. Many of the world’s main oil fields are being exhausted, and so there is a continuous search for new sources. And most of the new sources of oil are in remote locations or very deep water, requiring increasingly sophisticated technology for which the service companies can charge higher prices.

The stocks described below (in order of size) are in various sectors of the oilfield services industry, and they look appealing to us now.

Schlumberger’smarket capitalization is well over twice the size of its next largest competitor. It is considered to be the only fully vertically integrated oilfield company in the world. Schlumberger is cutting costs to help ride out the current downturn. Moreover, it sports a strong balance sheet that it can use to enhance its market share via investments in new technology and acquisitions. When the inevitable rebound in energy prices begins, Schlumberger will be a prime beneficiary.

Halliburton
became a pure play oilfield services company about two years ago when it divested itself of its
KBR
engineering and construction unit. Management expects today’s downturn in general activity to last about three quarters, or into the second quarter of 2009. If they are correct, the stock could begin to rebound soon.

FMC Technologies
has expertise in services and equipment used in the deepest ocean drilling, including recently setting a new record well depth of 9,365 feet in the Gulf of Mexico. Among other attractions, the company has a strong presence in Brazil, which may become the new Saudi Arabia if its deep offshore fields are as productive as expected.

Oceaneering International
conducts the lion’s share of its activities underwater. It is particularly strong in the market for remotely operated vehicles (ROVs), unmanned underwater robots equipped with cameras and manipulator arms. ROVs are especially useful in the search for oil and the maintenance of drilling operations in deep water where much of the future drilling activity is likely to occur.

GulfMark Offshore
operates a fleet of offshore supply vessels, largely in the North Sea, but also in Southeast Asia and the Americas, primarily Brazil and Mexico. The company has worked to maintain a younger fleet that provides competitive advantages, particularly in deepwater operations.

Global Industries
operates a fleet of cargo barges and construction/dive-support vessels in the Gulf of Mexico, Latin America, West Africa, the Middle East and Asia Pacific/India. The company has stumbled over the past year, but it is working on better managing its global operations while modernizing its fleet and building up its deepwater construction capabilities.

Newpark Resources
primarily provides drilling fluid products and engineering services. Domestic results have slowed, but international business has held up as evidenced by the signing of a major contract with Brazil’s oil giant
Petrobras
. Management is actively reducing headcount and other operating costs.

Tetra Technologies
makes fluids used in drilling activities, provides well abandonment and decommissioning services, and offers production testing services. Management recently pre-announced that hurricane-related charges and declining commodity prices will lead to a loss for the fourth quarter of 2008. As a result, the stock is down nearly 90% from its two-year high.